Bank of Canada holds interest rate at 1.5 per cent

The Bank of Canada left its interest rate unchanged Wednesday in what could be just a brief pause along its gradual path to higher rates.

The central bank kept its benchmark at 1.5 per cent — but many experts have predicted it could introduce another increase as early as next month.

In a statement Wednesday, the Bank of Canada said more hikes should be expected thanks to encouraging numbers for business investment, exports and evidence that households are adjusting to pricier borrowing costs.

“Recent data reinforce governing council’s assessment that higher interest rates will be warranted to achieve the inflation target,” the bank said as it explained the factors around its decision.

“We will continue to take a gradual approach, guided by incoming data. In particular, the bank continues to gauge the economy’s reaction to higher interest rates.”

Bank of Canada governor Stephen Poloz has raised the rate four times since mid-2017 and his most-recent quarter-point increase came in July.

The bank can raise its overnight rate as a way to keep inflation from running too hot. Its target range for inflation is between one and three per cent.

The Bank of Canada said the economy has seen improvements in business investment and exports despite persistent uncertainty about the North American Free Trade Agreement and other trade policy developments. NAFTA’s year-long renegotiation, which resumes Wednesday in Washington, and other trade unknowns are under close watch by the bank.

The statement also pointed to other encouraging signs in Canada, including evidence the real estate market has begun to stabilize as households adjust to higher interest rates and new housing policies. Credit growth has moderated, the household debt-to-income ratio has started to move down and improvements in the job market and wages have helped support consumption, it said.

Heading into Wednesday’s rate decision, analysts widely expected Poloz to hold off on moving the rate — at least for now.

Last month, Poloz stressed the need to take a gradual approach to rate increases in times of uncertainty. He made the remarks during a panel appearance at the annual meeting of central bankers, academics and economists in Jackson Hole, Wyo.

“Taking a gradual, data-dependent approach to policy is an obvious form of risk management in the face of augmented uncertainty,” he said in his prepared remarks.

In its statement Wednesday, the bank also explained why it’s not going to raise the interest rate based on a recent inflation reading that showed the number had climbed to the top of its target range.

July’s unexpectedly high inflation number of three per cent was just a temporary spike in the data caused by airfare and gasoline prices, the bank said. It predicted inflation to edge back down towards two per cent in early 2019.

Core inflation, which omits volatile components such as pump prices, has remained firmly around two per cent, the bank noted.